THIRD DIVISION

[G.R. No. 153866. February 11, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE

TECHNOLOGY (PHILIPPINES), respondent.

DECISION
PANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga,
Cebu -- like herein respondent -- are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added taxes or VAT. Although export sales
are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case,
the distinction between exempt entities and exempt transactions has little significance, because the
net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has
complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital
goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling
that it is entitled to such refund or credit.

The Case

[1]
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside
[2]
the May 27, 2002 Decision of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal
portion of the Decision reads as follows:

[3]
WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address at the
new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been
issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to
engage in the manufacture of recording components primarily used in computers for export.
 Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration
Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition
for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents] claim for
VAT refund.

The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the
[petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition
for Review in order to toll the running of the two-year prescriptive period.

For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations, the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or
illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
A claimant has the burden of proof to establish the factual basis of his
or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is
due to the fact that claims for refund/credit [partake of] the nature of an exemption from tax.
Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the
refund/credit sought. Failure on the part of the [respondent] to prove the same is fatal to its
claim for tax credit. He who claims exemption must be able to justify his claim by the clearest
grant of organic or statutory law. An exemption from the common burden cannot be permitted
to exist upon vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA)
registered Ecozone Enterprise, then its business is not subject to VAT pursuant to Section 24
of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as amended. As
[respondents] business is not subject to VAT, the capital goods and services it alleged to have
purchased are considered not used in VAT taxable business. As such, [respondent] is not
entitled to refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue
Regulations No. ([RR])7-95, and of input taxes on services pursuant to Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the
1997 Tax Code on filing of a written claim for refund within two (2) years from the date of
payment of tax.

[4]
On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.

Ruling of the Court of Appeals

 The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax
credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on capital goods purchased for the
period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives
under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987),
not of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it opted
for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a
VAT-registered entity, though, it was still subject to the payment of other national internal revenue
taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and
4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased,
respondent correctly filed the administrative and judicial claims for its refund within the two-year
prescriptive period. Such payments were -- to the extent of the refundable value -- duly supported
by VAT invoices or official receipts, and were not yet offset against any output VAT liability.
[5]
Hence this Petition.

Sole Issue

Petitioner submits this sole issue for our consideration:

Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of
P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period
[6]
April 1, 1998 to June 30, 1999.

The Courts Ruling

The Petition is unmeritorious.

Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT

[7]
No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is
[8] [9] [10]
entitled to the fiscal incentives and benefits provided for in either PD 66 or EO 226. It shall,
moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos.
[11] [12]
(RA) 7227 and 7844.

Preferential Tax Treatment

Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,
respondent shall not be subject to internal revenue laws and regulations for raw materials, supplies,
articles, equipment, machineries, spare parts and wares, except those prohibited by law, brought
into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or
otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such
[13]
activities. Even so, respondent would enjoy a net-operating loss carry over; accelerated
depreciation; foreign exchange and financial assistance; and exemption from export taxes, local
[14]
taxes and licenses.
Comparatively, the same exemption from internal revenue laws and regulations applies if EO
[15]
226 is chosen. Under this law, respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of customs procedure; unrestricted use of
consigned equipment; access to a bonded manufacturing warehouse system; privileges for foreign
nationals employed; tax credits on domestic capital equipment, as well as for taxes and duties on
raw materials; and exemption from contractors taxes, wharfage dues, taxes and duties on imported
[16]
capital equipment and spare parts, export taxes, duties, imposts and fees, local taxes and
[17]
licenses, and real property taxes.
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
[18]
importation of raw materials, capital and equipment -- is, ipso facto, also accorded to the
[19]
zone under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules
[20]
and regulations to the contrary -- extends to that zone the provision stating that no local or
[21]
national taxes shall be imposed therein. No exchange control policy shall be applied; and free
[22]
markets for foreign exchange, gold, securities and future shall be allowed and maintained.
Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of local commercial banks and offshore banking
[23]
units of foreign banks.
[24]
In the same vein, respondent benefits under RA 7844 from negotiable tax credits for locally-
produced materials used as inputs. Aside from the other incentives possibly already granted to it by
[25]
the Board of Investments, it also enjoys preferential credit facilities and exemption from PD
[26]
1853.
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
[27]
treatment. It is not subject to internal revenue laws and regulations and is even entitled to tax
credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is
exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered
[28]
person, however, is entitled to their credits.

Nature of the VAT and

the Tax Credit Method
 Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business, or imposed
on each sale, barter, exchange or lease of goods or properties or on each rendition of services in
[29]
the course of trade or business as they pass along the production and distribution chain, the tax
[30]
being limited only to the value added to such goods, properties or services by the seller,
[31]
transferor or lessor. It is an indirect tax that may be shifted or passed on to the buyer, transferee
[32]
or lessee of the goods, properties or services. As such, it should be understood not in the
context of the person or entity that is primarily, directly and legally liable for its payment, but in
[33]
terms of its nature as a tax on consumption. In either case, though, the same conclusion is
arrived at.
[34]
The law that originally imposed the VAT in the country, as well as the subsequent
[35]
amendments of that law, has been drawn from the tax credit method. Such method adopted the
mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe
[36]
and subsequently adopted in New Zealand and Canada. Under the present method that relies
on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs
[37]
the VAT paid on its purchases, inputs and imports.
[38] [39]
If at the end of a taxable quarter the output taxes charged by a seller are equal to the
[40]
input taxes passed on by the suppliers, no payment is required. It is when the output taxes
[41]
exceed the input taxes that the excess has to be paid. If, however, the input taxes exceed the
[42]
output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of
[43] [44]
capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or
[45] [46]
credited against other internal revenue taxes.

Zero-Rated and Effectively

Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively
zero-rated transactions as to their source.
[47]
Zero-rated transactions generally refer to the export sale of goods and supply of services.
[48]
The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax
[49]
chargeable against the purchaser. The seller of such transactions charges no output tax, but
can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.
[50]
Effectively zero-rated transactions, however, refer to the sale of goods or supply of
[51]
services to persons or entities whose exemption under special laws or international agreements
 [52]
to which the Philippines is a signatory effectively subjects such transactions to a zero rate.
Again, as applied to the tax base, such rate does not yield any tax chargeable against the
purchaser. The seller who charges zero output tax on such transactions can also claim a refund of
or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and

Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of
relief that results from either one of them is not.
[53] [54]
Applying the destination principle to the exportation of goods, automatic zero rating is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making
such seller internationally competitive by allowing the refund or credit of input taxes that are
[55]
attributable to export sales. Effective zero rating, on the contrary, is intended to benefit the
purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear
the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.
[56] [57]
But in an exemption there is only partial relief, because the purchaser is not allowed any
[58]
tax refund of or credit for input taxes paid.

Exempt Transaction
and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties
[59]
to the transaction.
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to
[60]
the tax status -- VAT-exempt or not -- of the party to the transaction. Indeed, such transaction is
not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes
paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
[61]
virtue of which its taxable transactions become exempt from the VAT. Such party is also not
subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on
its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
[62]
passed on by the seller to the purchaser of the goods, properties or services. While the liability
is imposed on one person, the burden may be passed on to another. Therefore, if a special law
merely exempts a party as a seller from its direct liability for payment of the VAT, but does not
relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-
registered suppliers, the purchase transaction is not exempt. Applying this principle to the case at
bar, the purchase transactions entered into by respondent are not VAT-exempt.
[63]
Special laws may certainly exempt transactions from the VAT. However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special
law under which respondent was registered. The purchase transactions it entered into are,
therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
[64] [65]
percent, depending again on the application of the destination principle.
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country
[66]
-- for use or consumption outside the Philippines, these shall be subject to 0 percent. If entered
into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10
[67]
percent, unless the purchaser is exempt from the indirect burden of the VAT, in which case it
shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,
[68]
because the ecozone within which it is registered is managed and operated by the PEZA as a
[69]
separate customs territory. This means that in such zone is created the legal fiction of foreign
[70] [71]
territory. Under the cross-border principle of the VAT system being enforced by the Bureau
[72]
of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority. If exports of goods and
[73]
services from the Philippines to a foreign country are free of the VAT, then the same rule holds
for such exports from the national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
[74]
registered person in the customs territory are deemed imports from a foreign country. An
ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as
[75]
foreign soil. This legal fiction is necessary to give meaningful effect to the policies of the special
[76] [77]
law creating the zone. If respondent is located in an export processing zone within that
ecozone, sales to the export processing zone, even without being actually exported, shall in fact be
[78] [79]
viewed as constructively exported under EO 226. Considered as export sales, such
[80]
purchase transactions by respondent would indeed be subject to a zero rate.

Tax Exemptions
Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt from
internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT
as a tax on consumption, for which the direct liability is imposed on one person but the indirect
burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged
for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT
on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on business
[81]
establishments operating within the ecozone. Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still
be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the
law. That no VAT shall be imposed directly upon business establishments operating within the
ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly.
Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited
directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except
[82]
for real property taxes that presently are imposed on land owned by developers. This similar
and repeated prohibition is an unambiguous ratification of the laws intent in not imposing local or
national taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be
[83]
subject to x x x internal revenue laws and regulations under PD 66 -- the original charter of
[84]
PEZA (then EPZA) that was later amended by RA 7916. No provisions in the latter law modify
such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more business
[85]
investments and creating more employment opportunities.
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except
those prohibited by law -- shall not be subject to x x x internal revenue laws and regulations x x
[86] [87]
x if brought to the ecozones restricted area for manufacturing by registered export
[88]
enterprises, of which respondent is one. These rules also apply to all enterprises registered
[89]
with the EPZA prior to the effectivity of such rules.
[90]
Fifth, export processing zone enterprises registered with the Board of Investments (BOI)
under EO 226 patently enjoy exemption from national internal revenue taxes on imported capital
[91]
equipment reasonably needed and exclusively used for the manufacture of their products; on
[92]
required supplies and spare part for consigned equipment; and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited by law -- brought
[93]
into the zone for manufacturing. In addition, they are given credits for the value of the national
internal revenue taxes imposed on domestic capital equipment also reasonably needed and
[94]
exclusively used for the manufacture of their products, as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the manufacture of their export
[95]
products and that form part thereof.
[96]
Sixth, the exemption from local and national taxes granted under RA 7227 are ipso facto
[97]
accorded to ecozones. In case of doubt, conflicts with respect to such tax exemption privilege
[98]
shall be resolved in favor of the ecozone.
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used
[99]
in the production of export goods, and for locally produced raw materials, capital equipment and
[100]
spare parts used by exporters of non-traditional products -- shall also be continuously enjoyed
[101]
by similar exporters within the ecozone. Indeed, the latter exporters are likewise entitled to
such tax exemptions and credits.

Tax Refund as
Tax Exemption

[102]
To be sure, statutes that grant tax exemptions are construed strictissimi juris against the
[103] [104]
taxpayer and liberally in favor of the taxing authority.
[105]
Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those
[106]
refunds bear the burden of proving the factual basis of their claims; and of showing, by words
[107]
too plain to be mistaken, that the legislature intended to exempt them. In the present case, all
the cited legal provisions are teeming with life with respect to the grant of tax exemptions too vivid
to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not
exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of
transactions that are otherwise taxable is merely a necessary incident to the tax exemption
[108]
conferred by law upon it as an entity, not upon the transactions themselves. Nonetheless, its
exemption as an entity and the non-exemption of its transactions lead to the same result for the
following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon
[109]
to execute or administer such laws will have to be adopted. Their prior tax issuances have
held inconsistent positions brought about by their probable failure to comprehend and fully
appreciate the nature of the VAT as a tax on consumption and the application of the destination
[110]
principle. Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and
correctly provides that any VAT-registered suppliers sale of goods, property or services from the
customs territory to any registered enterprise operating in the ecozone -- regardless of the class or
 [111]
type of the latters PEZA registration -- is legally entitled to a zero rate.
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is
its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks to encourage and promote foreign commerce as
a means of x x x strengthening our export trade and foreign exchange position, of hastening
industrialization, of reducing domestic unemployment, and of accelerating the development of the
[112]
country.
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, the government shall actively encourage, promote, induce and accelerate
a sound and balanced industrial, economic and social development of the country x x x through the
establishment, among others, of special economic zones x x x that shall effectively attract
[113]
legitimate and productive foreign investments.
Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall
x x x meet the tests of international competitiveness[,] accelerate development of less developed
[114]
regions of the country[,] and result in increased volume and value of exports for the economy.
Fiscal incentives that are cost-efficient and simple to administer shall be devised and extended to
significant projects to compensate for market imperfections, to reward performance contributing to
[115]
economic development, and to stimulate the establishment and assist initial operations of the
[116]
enterprise.
[117]
Wisely accorded to ecozones created under RA 7916 was the governments policy --
[118]
spelled out earlier in RA 7227 -- of converting into alternative productive uses the former
[119] [120]
military reservations and their extensions, as well as of providing them incentives to
[121]
enhance the benefits that would be derived from them in promoting economic and social
[122]
development.
Finally, under RA 7844, the State declares the need to evolve export development into a
[123]
national effort in order to win international markets. By providing many export and tax
[124]
incentives, the State is able to drive home the point that exporting is indeed the key to national
survival and the means through which the economic goals of increased employment and enhanced
[125]
incomes can most expeditiously be achieved.
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust environment for business to enable firms to compete
[126]
better in the regional as well as the global market. After all, international competitiveness
requires economic and tax incentives to lower the cost of goods produced for export. State actions
that affect global competition need to be specific and selective in the pricing of particular goods or
[127]
services.
 All these statutory policies are congruent to the constitutional mandates of providing incentives
[128]
to needed investments, as well as of promoting the preferential use of domestic materials and
[129]
locally produced goods and adopting measures to help make these competitive. Tax credits
for domestic inputs strengthen backward linkages. Rightly so, the rule of law and the existence of
credible and efficient public institutions are essential prerequisites for sustainable economic
[130]
development.

VAT Registration, Not Application

for Effective Zero Rating,
Indispensable to VAT Refund

[131]
Registration is an indispensable requirement under our VAT law. Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office. However, it
is now too late in the day for petitioner to challenge the VAT-registered status of respondent, given
the latters prior representation before the lower courts and the mode of appeal taken by petitioner
before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from
internal revenue laws and regulations the equipment -- including capital goods -- that registered
[132]
enterprises will use, directly or indirectly, in manufacturing. EO 226 even reiterates this
[133]
privilege among the incentives it gives to such enterprises. Petitioner merely asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to the VAT.
Consequently, the capital goods and services respondent has purchased are not considered used
[134]
in the VAT business, and no VAT refund or credit is due. This is a non sequitur. By the VATs
very nature as a tax on consumption, the capital goods and services respondent has purchased are
subject to the VAT, although at zero rate. Registration does not determine taxability under the VAT
law.
Moreover, the facts have already been determined by the lower courts. Having failed to present
[135]
evidence to support its contentions against the income tax holiday privilege of respondent,
petitioner is deemed to have conceded. It is a cardinal rule that issues and arguments not
[136]
adequately and seriously brought below cannot be raised for the first time on appeal. This is a
[137] [138]
matter of procedure and a question of fairness. Failure to assert within a reasonable time
warrants a presumption that the party entitled to assert it either has abandoned or declined to
[139]
assert it.
The BIR regulations additionally requiring an approved prior application for effective zero
[140]
rating cannot prevail over the clear VAT nature of respondents transactions. The scope of
[141]
such regulations is not within the statutory authority x x x granted by the legislature.
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former
[142]
cannot purport to do any more than interpret the latter. The courts will not countenance one
 [143]
that overrides the statute it seeks to apply and implement.
Other than the general registration of a taxpayer the VAT status of which is aptly determined,
no provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not
and cannot become exempt simply because an application therefor was not made or, if made, was
denied. To allow the additional requirement is to give unfettered discretion to those officials or
agents who, without fluid consideration, are bent on denying a valid application. Moreover, the
[144]
State can never be estopped by the omissions, mistakes or errors of its officials or agents.
Second, grantia argumenti that such an application is required by law, there is still the
[145]
presumption of regularity in the performance of official duty. Respondents registration carries
with it the presumption that, in the absence of contradictory evidence, an application for effective
zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has
[146]
been obeyed by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely
to spur economic growth in the country and attain global competitiveness as envisioned in those
laws.
[147]
A VAT-registered status, as well as compliance with the invoicing requirements, is
sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business
and transactions can easily be perused from, as already clearly indicated in, its VAT registration
papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted
by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be
determined, not by their nature, but by the taxpayers negligence -- a result not at all contemplated.
Administrative convenience cannot thwart legislative mandate.

Tax Refund or
Credit in Order

Having determined that respondents purchase transactions are subject to a zero VAT rate, the
tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal
incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime
instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,
[148] [149]
for EO 226 also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely
exempts it from income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment
of income tax for a certain number of years, depending on its registration as a pioneer or a non-
pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in
lieu of local and national taxes imposable upon business establishments within the ecozone cannot
outrightly determine a VAT exemption. Being subject to VAT, payments erroneously collected
thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA
7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such
provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax
imposed on consumption, not on business. Although respondent as an entity is exempt, the
transactions it enters into are not necessarily so. The VAT payments made in excess of the zero
rate that is imposable may certainly be refunded or credited.

Compliance with All Requisites

for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming
[150]
a VAT refund or credit.
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from
Contex, in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.
[151]
Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund
or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT
invoices and have not been offset against any output taxes. Although enterprises registered with
the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic
[152]
capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226 -- starting
January 1, 1996, respondent would still have the same benefit under a general and express
exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of
RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in
ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed
by the sponsorship speeches in Congress during the second reading of House Bill No. 14295,
which later became RA 7916, as shown below:

MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x.

xxxxxxxxx

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x
[153]
tax credits for locally sourced inputs x x x.

And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover even the enforcement of internal
[154]
revenue laws, including prescription.

Summary
 To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is considered as a
separate customs territory. As such, respondent is exempt from all internal revenue taxes, including
the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead
of the 5 percent preferential tax regime. As a matter of law and procedure, its registration status
entitling it to such tax holiday can no longer be questioned. Its sales transactions intended for
export may not be exempt, but like its purchase transactions, they are zero-rated. No prior
application for the effective zero rating of its transactions is necessary. Being VAT-registered and
having satisfactorily complied with all the requisites for claiming a tax refund of or credit for the
input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

[1]
Rollo, pp. 8-20.
[2]
Id., pp. 21-30. Thirteenth Division. Penned by Justice Mercedes Gozo-Dadole, with the concurrence of Justices
Salvador J. Valdez Jr. (chair) and Amelita G. Tolentino (member).
[3]
CA Decision, p. 10; rollo, p. 30. Bold types and caps in the original.
[4]
CA Decision, pp. 2-4; rollo, pp. 22-24. Citations omitted.
[5]
The Petition was deemed submitted for decision on April 3, 2003, upon receipt by the Court of petitioners
Memorandum, signed by Assistant Solicitors General Cecilio O. Estoesta and Fernanda Lampas Peralta and
Associate Solicitor Romeo D. Galzote. Respondents Memorandum, signed by Attys. Dennis G. Dimagiba and
Franklin A. Prestousa, was filed on March 7, 2003.
[6]
Petitioners Memorandum, p. 5; rollo, p. 99. Original in upper case.
[7]
Referred to as ecozone, it is a selected area with highly developed, or which has the potential to be developed into,
agro-industrial, industrial, tourist/recreational, commercial, banking, investment and financial centers. 4(a),
Chapter I of RA 7916, otherwise known as The Special Economic Zone Act of 1995.
[8]
35, Chapter III of RA 7916.
[9]
PD 66 is the law creating the Export Processing Zone Authority or EPZA. See 1st paragraph of 23, Chapter III of RA
7916.
[10]
EO 226, in Article 1 thereof, is also known as the Omnibus Investments Code of 1987. See 1st paragraph of 23,
Chapter III of RA 7916.
[11]
RA 7227, in 1 thereof, is also known as the Bases Conversion and Development Act of 1992. See 51, Chapter VI of
RA 7916.
[12]
RA 7844, in 1 thereof, is also known as the Export Development Act of 1994. See 2nd paragraph of 23, Chapter III of
RA 7916.
[13]
17(1) of PD 66.
[14]
18 of PD 66.
[15]
Article 77(1), Book VI of EO 226.
[16]
Article 39 of EO 226, certain paragraphs of which are expressly repealed by the 2nd paragraph of 20 of RA 7716,
otherwise known as the Expanded Value Added Tax Law, deemed effective May 27, 1994. See Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 406 SCRA 178, 187, July 15, 2003.
[17]
Article 78 of EO 226.
[18]
(b) of the 2nd paragraph of 12 of RA 7227.
[19]
51, Chapter VI of RA 7916.
[20]
51, Chapter VI of RA 7916.
[21]
(c) of the 2nd paragraph of 12 of RA 7227.
[22]
(d) of the 2nd paragraph of 12 of RA 7227.
[23]
Referred to as the Central Bank under (e) of the 2nd paragraph of 12 of RA 7227.
[24]
17 of RA 7844.
[25]
16 of RA 7844. See 2nd paragraph of 23, Chapter III of RA 7916.
[26]
PD 1853 was the law that took effect in 1983, requiring deposits of duties upon the opening of letters of credit to cover
imports.
[27] nd
2 paragraph of 4, Chapter I of RA 7916.
[28]
A VAT-registered person is a taxable person who has registered for VAT purposes under 236 of the Tax Code.
Deoferio and Mamalateo, The Value Added Tax in the Philippines (1st ed., 2000), p. 265. See 9th paragraph of
4.107-1(a) of Revenue Regulations No. (RR) 7-95, implemented beginning January 1, 1996, as amended by 6 of
RR 6-97, effective January 1, 1997.
[29]
105 to 109 of RA 8424, as amended, otherwise known as the Tax Code.
[30]
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc., 163 SCRA 371, 378-379, June 30, 1988.
[31]
De Leon, The Fundamentals of Taxation (12th ed., 1998), p. 131.
[32] nd
2 paragraph of 105 of the Tax Code.
[33]
Deoferio Jr. and Mamalateo, The Value Added Tax in the Philippines (1st ed., 2000), pp. 33 & 36.
[34]
EO 273.
[35]
Vitug, J. and Acosta, Tax Law and Jurisprudence (2nd ed., 2000), p. 227.
See 193(d) of the National Internal Revenue Code of 1977 as further amended by 1 of Pres. Decree No. 1358 dated April
21, 1978, wherein the tax credit method, instead of the cost deduction method, was mandated to be applied in
computing the VAT due.
[36]
Deoferio Jr. and Mamalateo, supra, p. 34.
[37]
Id., pp. 34-35.
[38]
Output taxes refer to the VAT due on the sale or lease of taxable goods, properties or services by a VAT-registered or
VAT-registrable person. See last paragraph of 110(A)(3) and 236 of the Tax Code.
[39]
Presumed to be VAT-registered.
[40]
By input taxes is meant the VAT due from or paid by a VAT-registered person in the course of trade or business on the
importation of goods or local purchases of goods or services, including the lease or use of property from a VAT-
registered person. See penultimate paragraph of 110(A)(3) of the Tax Code.
[41]
110(B) of the Tax Code.
VAT-registered persons shall pay the VAT on a monthly basis. 114(A) of the Tax Code.
[42]
110(B) of the Tax Code.
[43]
These are goods or properties with estimated useful lives greater than one year and which are treated as depreciable
assets under 34(F) [formerly 29(f)] of the Tax Code, used directly or indirectly in the production or sale of taxable
goods or services. 3rd paragraph of 4.106-1(b) of RR 7-95.
These goods also refer to capital assets as this term is defined in 39(A)(1) of the Tax Code.
[44]
De Leon, p. 135.
[45]
Deoferio Jr. and Mamalateo, supra, p. 244.
[46]
Subject to the provisions of 106, 108 and 112 of the Tax Code.
[47]
De Leon, p. 133.
[48]
Deoferio Jr. and Mamalateo, supra, p. 190.
[49]
De Leon, p. 133.
[50]
106(A)(2)(c) of the Tax Code.
[51]
108(B)(3) of the Tax Code.
[52]
Deoferio Jr. and Mamalateo, supra, p. 215.
[53]
Under this principle, goods and services are taxed only in the country where these are consumed. Thus, exports are
zero-rated, but imports are taxed. Id., p. 43.
[54]
In business parlance, automatic zero rating refers to the standard zero rating as provided for in the Tax Code.
[55]
Deoferio Jr. and Mamalateo, supra, p. 189.
[56]
Id., p. 43.
[57]
Id., p. 121.
[58]
De Leon, pp. 133 & 135.
[59]
Deoferio Jr. and Mamalateo, supra, p. 118.
[60]
Id., p. 132.
[61]
Id., pp. 132-133.
[62]
De Leon, p. 132.
[63]
109(q) of the Tax Code.
[64]
Deoferio Jr. and Mamalateo, supra, p. 187.
[65]
Id., p. 69.
[66]
106(A)(2) of the Tax Code.
[67]
106(A)(1) of the Tax Code.
[68]
106(A)(2)(c) of the Tax Code.
[69] st
1 paragraph of 8, Chapter I of RA 7916.
A customs territory means the national territory of the Philippines outside of the proclaimed boundaries of the ecozones,
except those areas specifically declared by other laws and/or presidential proclamations to have the status of
special economic zones and/or free ports. 2.g, Rule 1, Part I of the Rules and Regulations to Implement Republic
Act No. 7916, otherwise known as The Special Economic Zone Act of 1995.
[70]
Deoferio Jr. and Mamalateo, supra, p. 227.
[71]
This principle is not clearly defined by any law or administrative issuance. See Id., p. 227.
[72]
2 of Revenue Memorandum Circular No. (RMC) 74-99 dated October 15, 1999.
This circular is an example of an agency statement of general applicability that takes the form of a revenue tax issuance
bearing on internal revenue tax rules and regulations. Commissioner of Internal Revenue v. CA, 329 Phil. 987,
1009, August 29, 1996, per Vitug, J., citing RMC 10-86. See 2(2), Chapter 1, Book VII of Executive Order No.
(EO) 292, otherwise known as the Administrative Code of 1987 dated July 25, 1987.
[73]
106(A)(2)(a) of the Tax Code.
[74]
See Deoferio Jr. and Mamalateo, supra, p. 201.
[75]
This zone is akin to the former army bases or installations within the Philippines. Saura Import and Export Co., Inc. v.
Meer, 88 Phil. 199, 202, February 26, 1951.
[76]
Deoferio Jr. and Mamalateo, supra, p. 199.
[77]
An export processing zone is a specialized industrial estate located physically and/or administratively outside customs
territory, predominantly oriented to export production, and may be contained in an ecozone. 4(a) and (d), Chapter
I of RA 7916.
[78]
Article 23, Chapter I, Title I, Book I of EO 226. See 2.mm.2), Rule I, Part I of the Rules and Regulations to Implement
Republic Act No. 7916, otherwise known as The Special Economic Zone Act of 1995.
[79]
Article 77(2), Book VI of EO 226.
[80]
106(A)(2)(a)(5) of the Tax Code.
[81]
24, Chapter III of RA 7916.
[82]
24, Chapter III of RA 7916, as amended by 4 of RA 8748 dated June 1, 1999.
[83]
17(1) of PD 66.
[84]
Estate of Salud Jimenez v. Philippine Export Processing Zone, 349 SCRA 240, 260-261, January 16, 2001. See 4th
paragraph, 11, Chapter II of RA 7916.
[85]
Commissioner of Customs v. Philippine Phosphate Fertilizer Corp., GR No. 144440, September 1, 2004, p. 7.
[86]
1, Rule VIII, Part V and Rule XV of the Rules and Regulations to Implement Republic Act No. 7916, otherwise known
as The Special Economic Zone Act of 1995.
[87]
A restricted area is a specific area within an ecozone that is classified and/or fenced-in as an export processing zone.
2.h, Rule I, Part I of the Rules and Regulations to Implement Republic Act No. 7916, otherwise known as The
Special Economic Zone Act of 1995.
[88]
A registered export enterprise is one that is registered with the PEZA, and that engages in manufacturing activities
within the purview of the PEZA law for the exportation of its production. 2.i, Rule I, Part I of the Rules and
Regulations to Implement Republic Act No. 7916, otherwise known as The Special Economic Zone Act of 1995.
[89]
1, Rule XXV of the Rules and Regulations to Implement Republic Act No. 7916, otherwise known as The Special
Economic Zone Act of 1995. See 56, Chapter VI of RA 7916.
[90]
Article 11, Chapter I, Book I of EO 226.
[91]
Article 39(c), Title III, Book I of EO 226, expressly repealed by the 2nd paragraph of 20 of RA 7716. Consequently,
enterprises registered with the BOI after December 31, 1994 will no longer enjoy the incentives provided under
said article starting January 1, 1996.
[92]
Article 39(m), Title III, Book I of EO 226.
[93]
Article 77(1), Book VI of EO 226.
[94]
Article 39(d), Title III, Book I of EO 226, also expressly repealed by the 2nd paragraph of 20 of RA 7716.
Consequently, enterprises registered with the BOI after December 31, 1994 will no longer enjoy the incentives
provided under said article starting January 1, 1996.
[95]
Article 39(k), Title III, Book I of EO 226.
[96] st
1 paragraph of 12(c) of RA 7227.
[97]
51, Chapter VI of RA 7916.
[98] nd
2 paragraph of 12(c) of RA 7227.
[99]
16(c), Article III of RA 7844.
[100]
16(e), Article III of RA 7844.
[101] nd
2 paragraph of 23, Chapter III of RA 7916.
[102]
Commissioner of Internal Revenue v. General Foods (Phils.), Inc., 401 SCRA 545, 550, April 24, 2003.
[103]
Commissioner of Internal Revenue v. Solidbank Corp., 416 SCRA 436, 461, November 25, 2003
[104]
Agpalo, Statutory Construction (2nd ed., 1990), p. 217.
[105]
BPI Leasing Corp. v. CA, 416 SCRA 4, 14, November 18, 2003.
[106]
Paseo Realty & Development Corp. v. CA, GR No. 119286, October 13, 2004, p. 14.
[107]
Surigao Consolidated Mining Co., Inc. v. Collector of Internal Revenue, 119 Phil. 33, 37, December 26, 1963.
[108]
Deoferio Jr. and Mamalateo, supra, p. 155.
[109]
Agpalo, supra, pp. 82-83.
[110]
Deoferio Jr. and Mamalateo, supra, p. 218.
[111]
3(3) of Revenue Memorandum Circular No. (RMC) 74-99.
[112]
1 and 2 of PD 66.
[113] nd
2 paragraph of 2, Chapter I of RA 7916.
[114]
Article 2.1, Chapter I of EO 226.
[115]
Article 2.3, Chapter I of EO 226.
[116]
Article 2.8, Chapter I of EO 226.
[117]
51, Chapter VI of RA 7916.
[118]
Tiu v. CA, 361 Phil. 229, 242, January 20, 1999.
[119] st
1 paragraph of 2, RA 7227.
[120]
12 and 15 of RA 7227.
[121]
John Hay Peoples Alternative Coalition v. Lim, 414 SCRA 356, 369, October 24, 2003.
[122] nd
2 paragraph of 2, RA 7227.
[123] st
1 paragraph of 2, Article I of RA 7844.
[124]
4(c) of Article I , 16, and 17 of RA 7844.
[125] nd
2 paragraph of 2, Article I of RA 7844.
[126]
2 of the Tax Code, as amended by RA 8761 effective January 1, 2000; and by RA 9010, the effectivity of which has
been retroacted to January 1, 2001.
[127]
American Society of International Law Proceedings, Indigenous People and the Global Trade Regime, 96 Asilproc
279, 281, March 16, 2002.
[128]
20 of Article II of the 1987 Constitution.
[129] nd
2 paragraph of 1 and 12 of Article XII of the 1987 Constitution.
[130]
Schwab, extract from the Preface of the Global Competitiveness Report 2003-2004, www.weforum.org, last visited
January 27, 2005, 9:05am PST.
[131]
236 of the Tax Code.
[132]
17(1) of PD 66 and 56, Chapter VI of RA 7916.
[133]
Article 77(1), Book VI of EO 226.
[134]
Petitioners Memorandum, p. 9; rollo, p. 103.
[135]
CA Decision, p. 7; rollo, p. 27; and CTA Decision, p. 5, rollo, p. 35.
[136]
Magnolia Dairy Products Corp. v. NLRC, 322 Phil. 508, 517, per Francisco, J.
[137]
Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corp., 204 SCRA 377, 383,
December 2, 1991, per Feliciano, J.
[138]
Ibid. See Advertising Associates, Inc. v. Collector of Internal Revenue, 97 Phil. 636, 641, September 30, 1955.
[139]
Atlas Consolidated Mining & Development Corp. v. Commissioner of Internal Revenue, 102 SCRA 246, 259, January
27, 1981, per De Castro, J.
[140]
4.107-1(d) of RR 7-95.
[141]
Commissioner of Internal Revenue v. Solidbank Corp., supra, p. 448, per Panganiban, J.
[142]
Vitug and Acosta, supra, p. 56.
[143]
Id., p. 57.
[144]
Spouses Morandarte v. CA, GR No. 123586, August 12, 2004, p. 15.
[145]
3(m) of Rule 131 of the Rules of Court.
[146]
3(ff) of Rule 131 of the Rules of Court.
[147]
113(A) of the Tax Code.
[148]
24, Chapter III of RA 7916, as amended by 4 of RA 8748.
[149] st
1 paragraph, 23, Chapter III of RA 7916.
[150]
As a matter of principle, it is inadvisable to set aside such a conclusion, because by the very nature of its functions and
sans abuse or improvident exercise of its authority, the Tax Court is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject x x x. Paseo Realty &
 Development Corp. v. CA; supra, per Tinga, J., p. 8.
[151]
Contex Corp. v. Hon. Commissioner of Internal Revenue, GR No. 151135, July 2, 2004, p. 11.
[152]
This provision has been expressly repealed by the 2nd paragraph of 20 of RA 7716. See note 94.
[153]
Legislative Archives, Committee Report No. 01027, House of Representatives, December 14, 1994, pp. 00132 &
00141.
[154]
Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.; supra, pp. 9-10.